In Finance, What Is Rate of Return?

The return on net assets is an indicator reflecting the level of return on shareholders' equity. It is the percentage ratio of a company's profit after tax divided by its net assets. It is used to measure the efficiency of a company's own capital to analyze the company's profitability.

Return on financial assets

Return on net assets is also called return on equity or return on equity. There are two calculation methods for this indicator: one is the fully diluted return on net assets; the other is the weighted average return on net assets. Different calculation methods yield different results of ROE index, so how to choose the method of calculating ROE becomes more important.

Regarding the nature, meaning and calculation options of the ROE index obtained from the two calculation methods, the author has some opinions:

I. Comparison of the Nature of Return on Net Assets Indicators Obtained from Two Calculation Methods

Fully diluted return on net assets = net profit for the reporting period ÷ net assets at the end of the period-(1)

Weighted average return on net assets = net profit for the reporting period ÷ average net assets (2)

In the formula (1) for calculating the fully diluted return on net assets, the numerator is the series of periods and the denominator is the series of time points. Obviously, the numerator and denominator are two aggregate indicators that are different in nature but have a certain relationship. The return on equity index should be an intensity indicator to reflect the intensity of the phenomenon and explain the share of unit net assets at the end of the period to the operating net profit .

In the weighted average return on equity calculation formula (2), the numerator net profit is provided by the denominator's net assets, and an increase or decrease in net assets will cause an increase or decrease in net profits. According to the characteristics of the average index, it can be judged that the result calculated in the weighted average return on equity calculation formula (2) is an average index, which illustrates the general level of net profit created by the unit's net assets.

Comparison of the meaning of the ROE index obtained by the two calculation methods

Due to the different nature of the ROA index obtained by the two calculation methods, their meanings are also different.

The meaning of the indicator calculated in the formula for calculating the fully diluted return on net assets (1) is to emphasize the end of the year. It is a static indicator that explains the sharing of operating net profit by the unit's net assets at the end of the period and can well explain the status of future stock values , So when a company issues shares or trades shares, it is important to determine the price of the shares. In addition, the comprehensively calculated return on net assets is an important factor affecting the company's value index, which is often used to analyze the earnings per share index.

The meaning of the indicators calculated in the weighted average return on net assets calculation formula (2) is to emphasize the results of net assets earning profits during the operating period.It is a dynamic indicator that the operator uses the unit's net assets to create new assets for the company during the operating period. How much profit. It is an average indicator that explains the company's ability to use the unit's net assets to create profitability. This indicator helps the company's relevant stakeholders to make a correct judgment on the company's future profitability.

Third, the calculation of the return on equity indicators

Because the index of return on net assets is a comprehensive stubborn indicator.

From the perspective of the operator's use of accounting information, the ROE indicator calculated in the weighted average ROE calculation formula (2) should be used. This indicator reflects the overall management level of the past year. , Making business decisions is of great significance. Therefore, enterprises should use the weighted average return on net assets when using the DuPont financial analysis system to analyze the financial situation of the enterprise. In addition, it can also be used to evaluate the performance of managers.

From the perspective of stakeholders outside the company, the ROE indicator calculated in the formula (1) of the fully diluted ROE should be used only based on the peculiarities of joint-stock companies: when new shares are added, the new shareholders must exceed the par value After paying in capital and obtaining the same rights and shares, shareholders at the end of the period have equal rights to the profit for the year. Because of this, in the "Content and Format Guidelines for Information Disclosure by Public Issuing Stock Companies No. 2: Contents and Formats of Annual Reports" issued by the China Securities Regulatory Commission, a comprehensive dilution method is required to calculate the return on net assets. The return on net assets calculated by the fully diluted method is more suitable for shareholders' judgment of the company's stock transaction price, so for accounting information disclosed to shareholders, the index calculated by this method should be used.

In short, more emphasis is placed on the return on net assets calculated using the weighted average method; more emphasis is placed on the return on net assets calculated using the fully diluted method.